Credit risks have increased sharply in Latin America since last year with a number of factors weighing down on the region, though sound policies in the two biggest countries have prepared them to weather the downturn better than most emerging markets.

“The good times are over in the Latin America,” said Shelly Sheddy, senior director at Fitch Ratings, in a conference call.

The collapse over the last year in commodities prices, including oil’s more than 50% decline combined with the contraction in the US and other countries that used to by exports from the region, will put a strain on the region’s public finances.

Even so, Sheddy said, “We believe Latin America is as well placed as it has been in decades” to cope with the kind of external shocks now being felt.

Sheddy said that Fitch continues to maintain its negative outlook on Mexico, the region’s second-largest economy after Brazil, implying a more than 50% chance that it will have its BBB+ credit rating downgraded with the next 18-24 months.

Among the threats to Mexico’s finances is its economic exposure to the US, its largest trading partner. It still retains one of the highest credit ratings in the region.

Peter Shaw, Fitch’s head of Latin America banks, said that non-performing loans both in Mexico and the broader region were expected to climb in the near term.

However, Shaw added: “We think the banks are entering this downturn in reasonably solid shape, and the banking systems in Brazil and Mexico are solidly capitalized.”

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This means there is less refinancing risk for companies in these countries, as they have access to domestic finance independent of foreign markets.

Fitch currently has a BBB- rating a stable outlook for Brazil. The country has built up its reserves to about $200bn (€147bn), and high real interest rates mean it has room to ease rates and cushion the downturn in its domestic economy.

Shaw addressed rumors that some of Brazil's domestic banks would be bought out by the government-backed banks such as Banco do Brasil. If that happens, said Shaw, the credit ratings of banks taken over would likely be given the same credit as the central government.

Sheddy emphasized that those countries in Latin America that in the past decade have embraced such macroeconomic policies, especially floating exchange rates and inflation targeting, are better prepared.

She included Chile, Brazil, Mexico, and Colombia in this group. These countries, Sheddy said, would likely have better support from multilateral organizations if they run into trouble.

On the other hand, countries such as Argentina, Venezuela, Bolivia and Ecuador will have a harder time of it because they have more unstable political regimes and less flexibility in their policies. There is also a greater risk of greater political instability in these countries.

In the case of Venezuela, for instance, its growth in recent years has been overly dependent upon high oil prices, but the country used its surpluses to fund its large fiscal expansion. The decline in prices now means the country is likely to start running central government deficits.

Sheddy referred to a recent Fitch report that found “a highly pro-cyclical fiscal stance and weak macroeconomic policy frameworks in Argentina, Ecuador and Venezuela are likely to result in economic contractions and deterioration in these countries’ external and fiscal balances.”